Citigroup Faces Big New Trouble

Citigroup, the financial giant that is one of the nation's largest banks and one of New York City's largest private-sector employers, is facing more trouble, with an analyst at Merrill Lynch forecasting an $18 billion write-down in the first quarter for Citi on top of the $18 billion in write-downs the company has already announced.

The head of Dubai's sovereign wealth fund, which declined to ride to Citi's rescue the last time around, said the financial giant would need an additional cash infusion. Shares of Citigroup fell 4.3% to $22.10 yesterday, its lowest closing level since December 1998, when the stock traded down in the wake of its merger with Travelers Group. Citigroup shares, which have plunged 25% so far this year, traded down more than 8% at their nadir yesterday.

CNBC reported that job cuts at the bank may reach 30,000.

The Citigroup sell-off is the latest hit for the financial services industry, which has seen investor confidence unravel following the comments of the Federal Reserve chairman, Ben Bernanke, on Capitol Hill last week that bank failures are likely. On Friday, Mr. Bernanke told the Senate Banking, Housing, and Urban Affairs Committee, "There will probably be some bank failures," sending the market into a tailspin.

"There is a panic of major proportions," an analyst at Punk Ziegel & Company, Richard Bove, said. "Bernanke started a rout in bank stocks last week, and now the big banks are being destroyed."

Sources familiar with Citigroup dismissed concerns that the bank could become insolvent. Citigroup statements in January indicated that the company will have enough capital to meet its targets by the end of the second quarter.

The Merrill Lynch research report predicted that Citigroup would suffer a loss of $1.66 a share in the first quarter due to $15 billion in subprime mortgage-related write-downs. Citi has $37 billion of subprime loans and related bonds on its book. The analyst, Guy Moszkowski, also predicted $3 billion in markdowns from loans used to finance leveraged buyouts and commercial real estate. Also yesterday, a Goldman Sachs analyst forecasted the bank would lose $1 a share.

According to Mr. Bove, the losses could potentially be even higher. Citigroup has as much as $125 billion of loans and securities that could have questionable value and be subject to write downs. If the economy falls into a severe recession and there is a 20% loss in value, it could lead to $25 billion in write-downs, he said.

"The losses are enormous, and there is a chance that not just Citigroup, but all of these financial firms could fail," the president of hedge fund Euro Pacific Capital, Peter Schiff, said.

Also spurring the sell-off were comments from the chief executive of the $13 billion Dubai International Capital, Sameer Al Ansari, who said the $26 billion Citigroup has raised in the past three months will be insufficient to keep the bank afloat. "It will take a lot more than that to rescue Citi and other financial institutions," he said at a private equity conference in Dubai. Because Citigroup and other big banks have approached the cash-rich Middle Eastern sovereign wealth funds for funding, they are better-equipped than most to know the truth behind banks' balance sheets, market watchers say.

In addition to concern over additional write-downs, equity investors are also shunning Citigroup stock because it has been diluted by the capital infusions. The sovereign wealth fund investors are buying preferred shares that come with double-digit yields, which means that any income Citigroup generates will go to paying the coupon for the preferred shareholders rather than paying dividends to the common shareholders.

"By committing to a huge coupon to the preferred shareholders there are no earnings left for the common shareholders, so the value of the stock is going to plunge," Mr. Schiff said.

But not every analyst was dismissing Citigroup. "They are fine, this is just fearmongering," a senior bank analyst at research firm Morningstar, Ganesh Rathnam, said. Many of the underlying securities that Citigroup has written down are still performing, with borrowers continuing to pay the interest on their loans. In addition, many of the securities are high-grade collateralized debt obligations and do not suffer from poor credit quality, he said.

"They are taking these write downs because spreads are widening, not because of poor credit quality," Mr. Rathnam said. "So these are just temporary write-downs and they will have to write it back up later on if they keep receiving interest payments."

To justify Merrill Lynch's $18 billion figure, "the level of losses would have to be staggering. Every loan would have to default and the bank would only collect $0.50 to $0.60 on the dollar," he said. "There is no economic justification, no basis for these numbers, in my opinion."

The fact that analysts are in such wide disagreement over the true value of Citigroup and other banks' holdings, highlights the confusion and uncertainty in the market.

"There is no confidence in the system whatsoever, and the financial establishment in Washington is bankrupt in terms of ideas," Mr. Bove said.